MONDAY, 30 AUGUST 2010Dismissal of dishonest franchisee: protecting a brand and interests in itIn November 2009 the Frankfurt am Main Higher Regional Court became the first German higher court to rule on the validity of termination of a business format franchise without notice based on the suspicion of a crime. The court ultimately affirmed the termination.

In short, the franchisee had the opportunity to place charity donation boxes in its restaurant in order to collect donations for children with serious illnesses. The suspicion arose that customer donations were not being passed on to the foundation, but rather had been deposited in the franchisee's private account. Under the franchise agreement, termination without notice was permitted if "a justified suspicion existed that the franchisee ... had committed or participated in a serious crime, in particular a property or tax offence with major consequences".

The court found that this termination provision was valid since the clause did not unreasonably prejudice the franchisee contrary to the principle of good faith and did not place the franchisee in a worse position than article 314 of the Civil Code, which provided for termination of a recurring contractual relationship without notice.

According to the higher court, an important factor in the success of any franchise system is the need to protect the high regard and reputation of the franchise system's brand in the interests of all participants in the system, particularly those of the other franchisees.

Source: article by Karsten Metzlaff or Karl Rauser (Noerr LLP) for International Law Office (here).